If you are like most debtors filing for bankruptcy, you may be behind on your rent, credit card bills and car payments. You also rely on your car to go to work, and the loss of your car would be devastating to your already precarious financial circumstances. Bankruptcy can be your opportunity to avoid repossession of your car and help you restore your credit rating. If you do keep paying on your car and pay it off after filing bankruptcy, the payments and the payoff should be noted on your credit report as required by the Fair Credit Reporting Act.
Reaffirming the Loan
If you still owe on your car loan and want to keep the car after you file Chapter 7, you will need to either redeem it or try to reaffirm the loan. To redeem the vehicle, you will need to pay the value of the car to the lender, which may involve litigation over how much it's worth. Reaffirmation means that you enter into a new agreement with the lender, subject to bankruptcy court approval, to continue paying on the car as usual. If you reaffirm the debt, you have to pay back the whole thing; if you default down the road and the car gets repossessed, you're on the hook for any remaining balance after the lender sells the car.
In some jurisdictions, reaffirmation agreements are not required to keep a car in Chapter 7; if you keep making your payments, you can keep the car. However, some lenders will not let you keep the vehicle unless you sign a reaffirmation agreement, and in some jurisdictions, you must sign a reaffirmation agreement or surrender the vehicle.
Further, if you avoid reaffirmation, the lender may not report your payments to the credit bureaus, thereby denying you the benefit of rebuilding your credit for your repayment efforts.
Read More: What Happens if the Signed Reaffirmation Agreement Was Not Filed During the Bankruptcy Procedures?
Chapter 13 Bankruptcy
If you earn too much money to qualify for Chapter 7, you may still seek protection from your lenders under Chapter 13 of the bankruptcy code. Under Chapter 13, you are put on a three-year or five-year repayment plan wherein you pay your disposable income to the bankruptcy trustee to disburse to your creditors. If your car is worth less than what you owe the lender, you may be able to obtain an order from the bankruptcy court reducing the outstanding balance to the car's current value and restructure the loan to a lower interest rate. This is called a cramdown.
Otherwise, you pay the car over the life of the plan, with interest, and pay it off by the end of the case. In either respect, your payments should be reported to the bureaus, as well as any payoff of the loan.
If you filed a Chapter 7 bankruptcy, your creditors stop reporting negative information on your accounts to the three credit reporting agencies at the time you receive your discharge, which is usually a few months after the case is filed.
If you pay off your car during your bankruptcy case, your lender should report all payments to the credit bureaus. Paying off debts always leaves a good mark on your credit, and if your payments are not being reported, you should contact the lender and demand that they report your payments. You should also contact the credit bureaus and lodge a complaint.
If you're unable to get the reporting fixed on your own, may have a cause of action against the lender under the Fair Credit Reporting Act, and you could obtain legal counsel to pursue your claim.
Kevin Owen has been a professional writer since 2005. He served as an editor for the American Bar Association's "Administrative Law Review." Owen is an employment litigator in the Washington D.C. metropolitan area and practices before various state and federal trial and appellate courts. He earned his Juris Doctor from American University.